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Facts
The assessee claimed a deduction of Rs. 69,36,456/- for interest expenses against interest income of Rs. 52,893/-. The assessee later contended that a portion of these expenses (Rs. 59,25,359/-) was actually business expenditure under Section 36(1)(iii) and the remainder (Rs. 10,11,097/-) was under Section 57.
Held
The Tribunal noted that the Assessing Officer and CIT(A) did not address the assessee's alternate claim under Section 36(1)(iii). The matter was restored to the Assessing Officer to verify the genuineness of the claim for interest expenditure as business expense and to ascertain the nexus for the expenses claimed under Section 57.
Key Issues
Whether the interest expenditure claimed as deduction under Section 57 was actually a business expenditure under Section 36(1)(iii), and whether the assessee could revise the claim at appellate stage.
Sections Cited
57, 36(1)(iii), 143(3), 270A(9), 194
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2018-19) Jitendra Prakashchandra Shah, Vs. Assistant Commissioner of 501, Panchsheel Residency, Income Tax, Panchsheel Cross Road, Circle-1(1)(1), Usmanpura, Ahmedabad-380013 Ahmedabad [PAN No.AOSPS0618C] (Appellant) .. (Respondent) Appellant by : Shri Anil Kshtriya, A.R. Respondent by: Shri B.P. Srivastava, Sr. DR 17.12.2024 Date of Hearing Date of Pronouncement 24.01.2025 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 02.04.2024 passed for A.Y. 2018-19.
The assessee has taken the following grounds of appeal:-
“1. On facts and circumstances of the case and in law, the order passed by the Ld. CIT(A) is bad in law, illegal besides being in violation of principle of natural justice & equity as passed without considering the material already placed on record, as such it is liable to be quashed and set aside.
2. On facts and circumstances of the case and in law, the Ld. CIT(A) has grossly erred in sustaining addition of Rs.69,36,456/- on account of interest expenses so added in the hands of the appellant by the A.O., when there is no justification in sustaining the same.
Jitendra Prakashchandra Shah vs. ACIT Asst.Year –2018-19 - 2– LEAVE CRAVED The appellant craves leave to add, alter, amend and/or withdraw any of the grounds or ground of appeal either before or at the time of appeal hearing. RELIEF CLAIMED The appellant respectfully urges that by allowing ground no.1 so being raised by the appellant, the impugned order may kindly be quashed or set aside, and by allowing ground no.2, the impugned addition of Rs.69,36,456/- u/s.57 of the Act may kindly be deleted.”
3. The brief facts of the case are that the case of the assessee was selected for limited scrutiny on the issue of interest deduction against “income from other sources”. For the impugned year under consideration, the assessee had received interest income of Rs. 52,893/- from various concerns to whom the assessee had given money by way of loans and advances. Against this income, the assessee had claimed deduction under Section 57 of the Act amounting to Rs. 69,36,456/-. The Assessing Officer asked the assessee to prove the nexus between interest paid on funds borrowed and funds on which interest income was earned by the assessee for ascertaining claim of deduction under Section 57 of the Act. During the course of assessment proceedings, the assessee submitted that out of total expenses claimed under section 57 of the Act amounting to Rs. 69,36,456/-, the assessee had incorrectly claimed deduction under Section 57 of the Act, with respect to interest expenses amounting to Rs. 59,25,359/-, which as per the assessee should have been claimed under Section 36(1)(iii) of the Act, as business expenses. This, according to the assessee, was an error on the part of the assessee and he submitted that only the balance amount of Rs. 10,11,097/- should have been claimed by the assessee as deduction under Section 57 of the Act. Accordingly, the assessee submitted revised computation of income before the Assessing Officer. However, the Assessing Officer observed that the assessee’s books of accounts had been duly audited and the assessee erred Jitendra Prakashchandra Shah vs. ACIT Asst.Year –2018-19 - 3– in filing revised computation of income without filing a revised Tax Audit Report or without filing a revised return of income. Further, the Assessing Officer was of the view that the assessee failed to prove the nexus between the funds borrowed and funds lent, for the purpose of allowability of claim of deduction under Section 57 of the Act. Accordingly, the Assessing Officer added a sum of Rs. 69,36,456/- under Section 57 of the Act to the income of the assessee. While passing the order the Assessing Officer, made the following observations:
“8. Since the assessee has failed to prove the interest expenditure to the extent of Rs. 69,36,456/- has been expended wholly and exclusively for the purpose of earning interest income, the claim of the interest expenses made by the assessee to the extent of Rs.69,36,4567- should be disallowed u/s 57 of the I.T Act.
9. A Show cause notice dated 19.02.2021 was also issued to the assessee, proposing the above mentioned addition of Rs. 69,36,456/- and requesting it to explain why the same should not be added to the total income of the assessee. In response, assessee only submitted the copy of its earlier reply dated 10.02.2021, which has already been discussed above, and requested to consider the same. It can be seen that assessee furnished no new explanation or justification as to why the interest expense should not be disallowed and simply filed its earlier reply. Therefore, it is presumed that assessee has nothing new to say in the matter. Hence, the interest expense claimed u/s 57 of Rs.69,36,456/- is hereby disallowed and penalty proceedings u/s 270A(9) of the Act are also initiated herewith for misreporting the income 10. In view of the above, the total income of the assessee for the AY 2018-19 is hereby assessed u/s 143(3) r.w.s.143(3A) & 143(38) of the I. T. Act, 1961, as below: Total income Income as per ROI Rs. 43,79,040/- Add: Disallowance u/s 57 Rs. 69,36,456/- Rs. 69,36,456/- Total income assessed Rs. 1,13,15,496/- ”
In appeal, Ld. CIT(A) upheld the order of Assessing Officer, with the following observations:
“The onus of proving that, certain expenditure has been incurred to earn the income is on the assessee. However, the assessee has failed to discharge the primary onus cast upon him to prove that interest expenditure to the extent of Rs. 69,36,456/- has Jitendra Prakashchandra Shah vs. ACIT Asst.Year –2018-19 - 4– been expended wholly and exclusively for the purpose of earning the interest income despite being provided an opportunity. In the view of the above discussions from point no.-(i) to (iv), this Appellate authority upholds the addition made by the assessing officer amounting to Rs 69,36,456/- u/s 57 of the Income-tax Act, 1961.”
The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(A). During the course of proceedings before us, the Counsel for the assessee submitted that Ld. CIT(A) erred in not appreciating the fact that the assessee has maintained two sets of books of accounts, one in respect of proprietary concern in the name and style of M/s. Yashvi Construction and second set of books accounts, being the personal set of books of accounts of the assessee i.e. Jitendra P. Shah. The Counsel for the assessee submitted that while preparing the return of income, interest expenses of Rs. 59,25,359/- has been wrongly claimed against “income from other sources”, instead of making such claim under the head “income from business or profession” under Section 36(1)(iii) of the Act since the same has been incurred for the purpose of business and profession. The remaining expenditure of Rs. 10,11,097/- was interest expenditure in the personal set of books of the assessee and claimed under Section 57 of the Act against the interest income of Rs. 52,893/- earned during the year under consideration. The Counsel for the assessee submitted that the assessee had submitted complete details of money borrowed and utilized for the purpose of business in the form of a detailed chart showing names and addresses of parties including PAN, amount borrowed, interest paid along with compliance of TDS provisions in respect of such interest payment made to the depositors, wherever the provisions of Section 194 of the Act were attracted. Further, the Counsel for the assessee also submitted that it is a well a settled law that the assessee can revise the computation of income at any stage, and the rightful claim of Jitendra Prakashchandra Shah vs. ACIT Asst.Year –2018-19 - 5– deduction of interest expenses incurred by the assessee cannot be denied to the assessee. This is more so in light of the fact that the assessee is maintaining two separate books of accounts and is engaged in the business of construction (in the name and style of M/s. Yashvi Construction) and for such purpose, undeniably, the assessee had taken loan on which interest was paid and the same was required to be allowed to the assessee under Section 36(1)(iii) of the Act.
In response, Ld. D.R. placed reliance on the observations made by the Assessing Officer and CIT(A) in their respective orders.
We have heard the rival contentions and perused the material on record.
On going through the facts of the instant case, we observe that the case of the assessee was opened under limited scrutiny to analyze the claim of deduction of interest expenses amounting to Rs. 69,36,456/- against interest income of Rs. 52,893/-. During the course of assessment, the assessee filed revised computation and stated that interest expenses amounting to Rs. 59,25,359/- have been incorrectly claimed under Section 57 of the Act, whereas such interest expenditure were incurred for it’s business purposes and were allowable under Section 36(1)(iii) of the Act in respect of construction business of the assessee, for which it is maintaining separate set of books of accounts. The assessee also submitted before us that interest was paid after due deduction of tax at source under Section 194 of the Act, wherever applicable and the complete details of parties including their names, addresses, PAN, amount borrowed and interest paid were duly submitted Jitendra Prakashchandra Shah vs. ACIT Asst.Year –2018-19 - 6– before the Tax Authorities. We observe that while passing the order, the Ld. Assessing Officer and CIT(A) have not made any observations with regard to the alternate claim of the assessee that interest was allowable under Section 36(1)(iii) of the Act. The only basis / reason for rejecting the claim of interest under Section 57 of the Act is that the assessee was not able to prove the nexus between the interest paid on amounts taken and the interest earned by the assessee. It is a well settled law that in case the assessee has made any error in filing the return of income, it would be open for him to revise the same or filed revised computation before Appellate Authorities. A legitimate claim of deduction cannot be denied to the assessee, only on the ground that the same was not claimed in the return of income. In our considered view, in all fairness, in the interest of justice, the matter may be restored to the file of Assessing Officer to verify the genuineness of the claim of the assessee whether the interest was taken for the purpose of business and whether such claim is allowable under Section 36(1)(iii) of the Act. The assessee has claimed that it has given complete details of parties to whom interest was paid and such loans were taken for the purpose of it’s construction business (in the name and style of M/s. Yashvi Construction). The Assessing Officer is accordingly, directed to verify the assessee’s claim of deduction under Sectio 36(1)(iii) of the Act with respect to interest expenditure. Accordingly, the Assessing Officer is directed to verify whether assessee is correct in claiming that the interest bearing funds on which interest to the tune of Rs. 59,25,359/- has been paid, were in fact used for the purpose of it’s construction business, for which the assessee is claiming to have been maintained separate books of accounts. Further, the assessee has submitted that it has claimed of Rs. 10,11,097/- under Section 57 of the Act and it has earned interest income of Rs. 52,893/- which has been offered to tax under the head income from other sources. Accordingly, the Assessing Officer is also directed to verify whether the assessee is able to establish the nexus between interest bearing funds and how the same have been utilized for earning interest income in terms of Section 57 of the Act. Accordingly, the Assessing Officer is directed to carry out the necessary verification as stated above and thereafter, pass appropriate orders in accordance with law.
In the result, the appeal of the assessee is allowed for statistical purposes. This Order is pronounced in the Open Court on 24/01/2025